Economic activity will take longer time to recover

The State Bank of Pakistan (SBP) on Thursday said recovery in economic activities will take longer time due to negative business sentiments prevailing in the private sector. The SBP in its annual report revealed that investment to GDP ratio declined for the second consecutive year to 19.7 percent in FY09 due to heightened security risk and on-going power crisis.
"Higher interest rates, increase in country risk premium, lower corporate earnings and further deterioration in macroeconomic stability in the initial months of FY09 were additional factors delaying investment decisions," the report added. The relative attractiveness of Pakistan as an investment destination was especially quite low from the perspective of foreign investors with already limited liquid resources to invest amid financial turmoil and a global recession, the SBP said.
As a result, despite the huge untapped potential, private investments in the economy declined during FY09, while fiscal constraints during the year also led public sector investment to decline.
Fiscal measures were also responsible in slowing down private investments in one of the fastest growing sectors of the economy and resultantly, aggregate investments during FY09 declined by 6.5 percent largest in 40 years, the SBP said and added: "this situation is not only worrying for current year performance of the economy, more importantly it signals that recovery in economic activity will take longer time than envisaged earlier due to negative business sentiments prevailing in the private sector."
Especially when the government's tight fiscal space will make it very difficult to pursue an incentive structure for pushing the industrial revival. Therefore, employment generation especially in urban areas and for educated youth will remain an uphill task at least in the coming two to three years. That has negative consequences for poverty reduction measures and achieving Millennium Development Goals as well.
Moreover, given the decline in investment demand as well as productivity in the industrial sector during FY08 and FY09, it appears that any demand pull stimulus to the economy going forward could create significant inflationary pressures, the report said.
Decomposition of investments shows that most of the decline came from foreign investments as the domestic investments declined only marginally. The decline in foreign investment in turn was due to both, unfavourable domestic conditions as well as global liquidity crunch. Pakistan's deteriorating (relative) performance in case of doing business, especially in the category of starting up a new business also contributed a part in the slowdown in foreign investment.
Financial sector and telecommunications were the two sectors that contributed most of the investment growth seen in the preceding five years. In FY09, however, the decline in investment in transport and communication contributed most in decline in total investment. In fact, telecommunication sector (especially the cellular phone category) alone had a share of 35 percent (on average) in total FDI in the last five years.
However, the stiff competition in this sector led to a decline in profits of cellular companies. According to PTA, most of the cellular operators dependent on foreign loans are operating in loss despite significant growth in revenues mainly due to depreciation of the rupee. Moreover, increase in FED/GST on cellular services from 15 percent to 21 percent in the Budget 2008-09 is considered as one of the major factors slowing the growth rate in cellular subscribers, cellular density as well as the investment in the sector during FY09.